I'm interested in buying subject to, and currently have on the hook a very motivated seller with a nice house. Trouble is she owes very close to what the house is worth, or maybe even more, between her mortgage balance and HELOC. I'm looking for opinions on whether a sandwich lease option agreement would be my best bet, and if so, how to structure it. The basics are a house with a FMV of about $150k, no repairs needed, a mortgage of 115K at 5.75% fixed, and $42K on the home equity loan. I appreciate your input.

Ru

Hi Ru, the sum of the debt payments per month is a key parameter to a LO or sandwitch LO deal working. The market rent has to be (for me) $300 higher than the total debt payments. Some will go as low as $200 spread, but that gets risky if you have a HVAC replacement or some maintenance issue and now that deal is negative for the year.

The seller will have to be ok with all debt staying in their name for a number of years till market appreciation and pay down creates equity for your exit profit by selling via a LO buyer at some future higher price.

With no equity and monthly cash flow, a sandwich lease would not be an option for me because there is no money in it to make up the risk that I would be stuck paying the mortgage when I didn't have a tenant for some reason. For me this would be a simple cooperative assignment where I would put the property under contract and find a tenant/buyer to assign to. I would get the assignment fee and then everything is between the owner and tenant.

@Ru Monsell We need to know more about the mortgage and HELOC payment amounts and the market rents. @Brian Gibbons is good with these types of deals. Maybe he will chime in.

Thanks @Brian L.

@Misty Weaver

and @Curt Smith gave excellent advice.

If you have a 1st at 70% of payment, and the HELOC is 30% of payment, and the HELOC is not paying for home improvements but say debt consolidation,

Ex) $100K house, $1000 market rent monthly

1st mortg $700 per month owe $90K balance

2nd mortg HELOC $300 per month owe $10K

Offer to buy sub2 at $700 per month and seller contributes to paying the HELOC.

When doing ANY deals with lease options, sub2, wraps, etc, and they have no equity, it is helpful to have a discussion on

Selling with and Agent vs Renting vs Selling on Terms

I use a 3 column method to describe the costs to sell with an agent. You can see a video of that on my blog

http://www.biggerpockets.com/blogs/3-reiskills-and-brian-gibbons/blog_posts

@Brian Gibbons Wow having the seller keep paying on the heloc if it's for debt consolidation. Brilliant!

Misty's got a great handle. Like Brian's MO.